DBRS Confirms Inter Pipeline (Corridor) Inc. at “A” and R-1 (low)

DBRS has today confirmed the ratings on the Senior Unsecured Debentures and Commercial Paper (CP) of Inter Pipeline (Corridor) Inc. (Corridor) at “A” and R-1 (low), respectively, both with Stable trends.

The confirmations reflect Corridor’s restored financial profile and DBRS’s expectation that Corridor’s near term debt re-financing requirements (see below) will be addressed in a satisfactory manner. The Corridor expansion entered commercial service on January 1, 2011, at an estimated cost of $1.85 billion, slightly above the original $1.8 billion estimate due to higher than expected non-controllable costs such as line fill and final tank construction cost adjustments that were added to rate base. On that date, expansion construction costs were added to the rate base and Corridor began to receive incremental revenue. Corridor’s rate base more than tripled relative to the previous level. Inter Pipeline Fund (IPF; concurrent confirmation at BBB (high) with a Stable trend (see separate IPF press release)) has estimated that it expects incremental EBITDA of approximately $145 million per year from Corridor.

Also underpinning the confirmations are the following factors:

(1) In early January 2011, Corridor’s debt-to-capital ratio was restored to pre-expansion levels as a result of IPF’s $460 million equity injection into Corridor, the newly constructed assets were added to rate base and Corridor’s increased revenue requirement under the Firm Service Agreement (FSA). The IPF equity contribution was used to repay advances under the two “recourse to IPF” tranches of Corridor’s revolving credit facility. Corridor’s debt-to-capital ratio had significantly weakened during construction (financed entirely with debt). A stable financial profile with reasonable interest and debt service coverage ratios has been restored, supported by the long-term FSA.

(2) In August 2012, the two “non-recourse to IPF” tranches of Corridor’s revolving credit facility (combined total availability of $1.654 billion) will come due. DBRS expects that Corridor will re-finance a portion of these amounts with long-term debt in advance of the maturity date, with the balance to be funded on an ongoing basis by a scaled-back CP program that is 100% backstopped by committed credit facilities.

(3) Corridor owns the Corridor Pipeline System, which provides a vital link for the transportation of bitumen and diluent between two major components of the Athabasca Oil Sands Project (AOSP): the Muskeg River Mine and Jackpine Mine, north of Fort McMurray, Alberta, and the Scotford Upgrader adjacent to Shell Canada Energy’s (Shell Canada) Scotford Refinery, near Edmonton. DBRS believes that the shippers’ large commitment to the AOSP ensures their strong incentive to make sure that Corridor is fully utilized to the extent possible.

(4) Corridor is supported by a long-term cost-of-service FSA with quality shippers, which are also the AOSP sponsors: (a) Shell Canada provides 60% of the commitments, guaranteed by Shell Petroleum N.V. (SPNV), which has a private long-term rating in the AA range by DBRS. DBRS notes that the guarantee may be revoked under certain circumstances, although that is highly unlikely to occur. (b) Chevron Canada (guaranteed by its parent, Chevron Corporation (Chevron; rated AA by DBRS)) and (c) Marathon Oil Canada Corporation (Marathon Canada), a subsidiary of Marathon Oil Corporation (Marathon), each account for 20% of the commitments.

Corridor faces other challenges, not addressed above, which are considered manageable:

(1) Theoretically, the weighted-average credit rating of the shipper group could be significantly weakened through the addition of lower-rated third-party shippers to Corridor for future expansions. However, DBRS expects that the importance of AOSP to the current sponsors/shippers and the importance of Corridor to the success of AOSP would compel the current sponsors/shippers to take actions to cure any default by a lower-rated third-party shipper. DBRS notes that there are currently no plans to add third-party shippers.

(2) Corridor’s earnings are sensitive to changes in interest rates, which affect its allowed ROE and credit metrics. Given the current low interest rate environment, Corridor’s allowed ROE is relatively low compared with other similarly-regulated pipelines and utilities in Canada.

The Corridor expansion increased diluted bitumen (DilBit) throughput capacity from 300,000 barrels per day (b/d) to 465,000 b/d. Completion of subsequent phases, with much more modest capital requirements, would result in up to 1.4 million b/d of total DilBit capacity through the installation of additional pumping stations and provide an opportunity for third-party shippers or producers to utilize spare capacity on the Corridor Pipeline System.

Finally, DBRS notes that the Corridor ratings incorporate DBRS’s review of financial information and other relevant information that is not disclosed in this press release due to the private nature of the Company.

Note:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating North American Pipeline and Diversified Energy Companies , which can be found on our website under Methodologies.